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Compound Growth

29th June 2016

Clearing Obligation Starts for Category 1 Firms

Last Tuesday, 21 June 2016, the clearing obligation under Article 4 of EMIR came into effect. This required mandatory clearing for certain counterparties, meaning that all relevant OTC interest rate derivative contracts entered into or novated on or after 21 February 2016 must have been cleared by an EMIR EU authorised, or non-EU recognised Clearing Counterparty (CCP) by this date.

This clearing obligation whilst effective from 21 June 2016 is subject to phase-ins which are based on a firm’s categorisation and derivatives volumes.

Who does this clearing obligation apply to?

This EMIR clearing obligation applies to contracts between any combination of financial counterparties and non-financial counterparties who exceed the clearing threshold.

Further detailed information on what is within scope of the obligation can be found in the Annex to the Delegated Regulation, however as a high level overview, the derivatives that are subject to the clearing obligation fall within the following types:

 Interest Rate Derivatives denominated in the G4 Currencies

o This includes particular classes of OTC interest rate derivative contracts that are denominated in EUR, GBP, USD and JPY (the G4 currencies) and involve the following types of contract: fixed to-float interest rate swaps (IRS); basis swaps; forward rate agreements and overnight index swaps

 Credit Default Derivative Contracts

o untranched iTraxx Index credit default swaps (Europe Main, 5-year tenor, series 17 onwards, with EUR as the settlement currency); and

o untranched iTraxx Index credit default swaps (Europe Crossover, 5-year tenor, series 17 onwards, with EUR as the settlement currency)

 Interest Rate Derivatives denominated in the non-G4 Currencies

o This encompasses certain classes of OTC interest rate derivative contracts denominated in particular currencies – namely SEK, PLN and NOK – all of which are non-G4 currencies. Types of contract that are included being: fixed-to-float interest rate swaps (IRS) and Forward Rate Agreements.

EMIR Firm Categorisation:

Firms and their derivatives counterparties might fall into any of the four EMIR clearing categories as follows:

Category 1: Firms that are already clearing members of a CCP.
Category 2: Non Category 1 firms whose group’s aggregate month-end average of outstanding notional amount of OTC derivatives is above €8bn (assessed over Jan/Feb/Mar of each year).
Category 3: Non Category 1 or Category 2 firms whose group’s aggregate month-end average of outstanding notional amount of OTC derivatives is below €8bn (assessed over Jan/Feb/Mar of each year).
Category 4: Counterparties that are Non-Financial

In order to know when their clearing obligation and frontloading obligations (if applicable) will apply from, firms will need to have determined their own clearing categorisations in addition to the clearing category of their derivatives counterparties.

Under EMIR there is also a frontloading requirement which requires financial counterparties in Category 1 and Category 2 to clear relevant OTC derivative contracts entered into or novated on or after the given frontloading start dates. Please refer to the implementation timetables below for more detailed information on the frontloading start dates. In addition, a list of clearing members can be found on the relevant CCP websites and is publicly available.

In summary of regulatory requirements, the FCA advises of the following timetable for implementation of the clearing obligation (in addition to any frontloading obligations that might be applicable), by the type of derivatives and between which categories of contracting firms they affect.